Mortgage forbearance is a temporary pause or reduction in monthly mortgage payments for a homeowner experiencing financial hardship. It's not loan forgiveness; instead the deferred payments do need to be repaid at some point. But mortgage forbearance can be a lifeline for homeowners who unexpectedly lose their job or suffer losses from a natural disaster, including the COVID-19 pandemic.
The key to avoiding foreclosure during a financial crisis is to ask for help immediately, says Chuck Kracht, director of loan servicing for the Idaho Housing and Finance Association, which offers free loan counseling to struggling borrowers.
"That's the best advice I can give to anyone," says Kracht. "The second anyone has any sort of trouble, they need to call their mortgage servicer or lender, or a loan counselor."
Time is of the essence, because if you're able to stay current on your mortgage payments not only will your lender be more open to forbearance, but your credit also won't take a hit. During forbearance, paused payments aren't reported to the credit agencies as delinquent if you were on time with your previous monthly payments.
"Mortgage forbearance is when a lender or mortgage servicer either pauses or lowers your payment for a limited period of time," says Kracht. "It's designed to provide payment relief during a short-term financial difficulty."
In non-pandemic times, forbearance plans are typically offered as a way to keep borrowers in their homes during a period of unemployment or recovery from a natural disaster like a hurricane or wildfire.
The terms of a forbearance agreement depend on the borrower's specific financial situation, so lenders typically ask for financial records like monthly income and expenses. Sometimes the mortgage payment is reduced and other times it's suspended entirely. Kracht says that the typical length of forbearance runs from three months to a year.
How Are Deferred Payments Repaid?
Mortgage forbearance is a temporary solution to financial hardship, not a long-term fix. Once a borrower is back on their financial feet, Kracht says that there are three standard options for repaying a forborne mortgage:
- Tack it on to the end. Many lenders will allow homeowners to move all deferred payments to the end of the mortgage. Think of it as a no-interest second loan that's repaid either when the house is sold or when the original mortgage is fully repaid.
- Add it to your monthly payment. A second option is to slowly repay the deferred amount as a small increase in your remaining monthly mortgage payments.
- Pay it off in one lump sum. While this option is less common, some borrowers pay off the full amount of deferred mortgage payments immediately after the forbearance period ends.
Benefits and Drawbacks of Mortgage Forbearance
Forbearance is a smart option for both borrowers and lenders. For borrowers, the biggest plus is that it offers a temporary break from monthly mortgage payments without adversely affecting their credit. Forbearance gives them much-needed time to find a new job or recover from a disaster without technically missing a payment.
Kracht says that forbearance is a good deal for banks and mortgage lenders, too, even if it means a reduction or pause in payments, because anything is better than foreclosure.
"The foreclosure process really doesn't benefit anybody," says Kracht. "It's very costly to go through foreclosure. The alternative is retention, keeping somebody in their home, which is the best option."
The main drawback to forbearance would be that if you have trouble paying the mortgage in general (because you don't earn enough for instance) at some point, the payments are going to come due. As we said earlier, loan forbearance is not the same as loan forgiveness, so the unpaid debts continue to accrue.